How to Trade the Debt Ceiling Crisis

Is there a real debt crisis in the U.S., and if so, can it be traded? The
answer to the first question is yes and no, and the second is yes and maybe. Was
I clear? No? OK, here goes. Keep in mind there are always opportunities for
profit for options trading investors. IS THERE A REAL DEBT CRISIS? YES .
Congress, specifically the newer members of the Republican Party, are
threatening to hold up approval of an increase in the debt limit for Uncle Sam
until there are meaningful plans put in place to cut spending. Not cut the
deficit but cut spending. After all, they say taxes are off the table. I am not
going to get into politics, but the discussions that include statements the debt
ceiling should not be raised and it is "OK" if the US "temporarily"
defaults on its sovereign debt are criminal.  A default by the US this would
happen if we couldn't borrow enough to pay off past obligations that come due
this summer would make the post-Lehman crash in 2008 look like a bull market. A
real default would cut stock indices by at least two thirds – an S&P 500 down
as low as 400; it is 1340 and change right now. NO . I believe there is a one in
10,000 chance this will happen. Speaker of the House John Boehner is a grown up,
unlike many of his members, and is letting his newer members speak, and
pandering to them for now, but he understands what would happen. That being
said, he is going to play chicken far longer than I and anyone should prefer.
FACTS: The theoretical date things get terrible is the first week of August and
the thing to watch is the interest rates on new 30-day bonds issued in July,
although Treasury may try to avoid doing this.  The political class is now so
used to fomenting crises for C-SPAN and fund raising they may take this out too
close to the end game for comfort. You think not? The TARP did not pass the
first time around the market fell more than 800 points in a few nanoseconds
and the TARP passed Congress right after that. This would be far more dramatic.
CAN YOU TRADE THIS? MAYBE . I believe the debt ceiling will be raised and the
potential for trading this nonsense is based on how much Congress "plays
chicken" with the debt ceiling. This trade is already taking shape, and is
based on movements in interest rates a crisis will spark in an increase in
interest rates and that will hit the value of existing bonds. So "maybe"
means the ceiling will be raised but the trade is in the buildup to
Congressional action. YES . If you believe the game of chicken will go too far
and want to trade the buildup to what would be a real crisis, you need to look
at options on ETFs for bonds and precious metals.  (You should probably be long
precious metals anyway given the short-, mid- and long-term state of the world).
Here's what will move as we near the deadline. The ProShares UltraShort 20+
Year Treasury (NYSE: TBT ) this is a double inverse ETF that goes up,
theoretically, 2% every time the value of the 20-year U.S. bond goes down 1%.
You can buy call options on this ETF. Do not do this now, just be prepared to do
so. The iShares  Barclays 20+ Year Treasury Bond (NYSE: TLT ) the TLT is the
long side ETF for 20-year bonds that goes up 1% every time the value of bonds
goes up 1%. You can buy put options on this puppy. Less volatile and speculative
than the TBT. The SPDR Gold Trust (NYSE: GLD ) and the iShares Silver Trust
(NYSE: SLV ) These are the ETFs for gold and silver, the safe havens when
crises hit, and there ain't going to be a bigger one than a US debt default.
The call options are very liquid. I own SLV outright and sell covered calls
against it. If you do any of this, play options no sooner than September. Find
here a list of bond funds. What to do? The real trade is the build up to a
crisis when you can play the game of chicken. But, if for some reason Congress
loses its mind, refuses to raise the debt ceiling and the US defaults on its
bonds, it's early retirement for all of us.